Pardon the interruption

Below is my take on the start on the year to now. An attempt to tease out the key elements as a guide to where we may be heading. I wrote this as a guide to myself and a reference for the team but it may be of some interest…….or not.

Part 1 – from the start

I was aware of Covid 19 in January, I saw the China reports but crucially assumed them a rerun of previous similar influenza issues and Asia centric.

A big mistake, Covid was different.

Once the virus hit Europe I asked myself whether this was a systemic problem or a disruption. Systemic meaning changing things permanently, not just for a time. Prior Influenza epidemics had been disruptions.

Some things have systemically changed due to Covid.

My main role is researching information to help map out future probabilities. Understanding what is known, to identify choices offering the highest probability of future successful outcomes.

Faced with something never seen before, this initially looked undoable.

But quickly becoming clear, actually pretty straight forward.

Technology allowing remote interactions would boom, as would healthcare.

Anything involving large groups closely interacting would be compromised.

This gave confidence in the LWM portfolios. They were weighted towards the Technology and Healthcare investment themes before the pandemic so aligned to benefit.

Running alongside all the above was the question.

‘Just how dangerous is Covid 19?’

Obviously it’s dangerous to health, but the question in this context relates to economic health not personal.

From an economic perspective and using the analogy of a forest fire, the fire does relatively little permanent damage to the forest unless it burns too hot for too long. So the key questions are.

How hot?

How long?

I wrote the blog in March which highlighted the significant divergence in the models of pandemic severity being produced by U.K. epidemiologists. I didn’t offer any personal view because what the hell did I know, but was concerned the Imperial study was based on shallow levels of data predicting extreme outcomes.

THE key variable for all the early models was the assumed percentages of those contracting the virus who then developed severe symptoms.

Crucially at this time, the data available was primarily from those reporting severe symptoms. There was no general testing so total infection levels had to be a best guess.

The Princess Diamond cruise ship was quarantined in late February for a month due to an outbreak of Covid. At the time, half the known cases outside of China were on that ship. The outcomes are therefore probably amongst the more accurate indicators of the real world numbers for the virus. A science experiment in effect for a closed environment where the virus was active with everyone intermingled then tested continuously.

The average age of passengers was 58.

Over 1 month post the start of quarantine there was daily testing.

Total passengers 3711

Total positive infections 709 (19%)

Of total positives those asymptomatic (no symptoms) over 50%

Total deaths 6.

All were over age 70 with pre existing health issues.

The Imperial model which the U.K. Government used as its guide for lockdown would have predicted 116 deaths.

* Argonaut Research – Go Barry

The lockdown was imperative for slowing the infection rate. There was no doubt of NHS overwhelm if action was not taken.

So literally buying time by shuttering economies was a valid cost, both to protect health services but also allowing the virus to be studied and treatment protocols designed and refined. In retrospect it is clear some of the awful early outcomes for patients were partly due to sub optimal treatment regimes.

The single difference that was making ALL the difference with Covid 19 was: ‘SPEED’

Compared to previous influenza based mass infections (SARS, Swine flu, Bird Flu etc which were all life threatening) the infection spread for Covid is quantumly faster.

The speed of infection rates caused higher incidence of severe outcomes over a shorter period. As this was not initially understood things appeared dire.

The theme of speed can equally be applied to Western investment market reactions to the realisation of the severity of Covid 19. They fell on average around 30% in a matter of a few days. Historic.

The policy responses from Western Central Banks however was equally swift and historic. The magnitude of the economic relief packages were at least equal to the magnitude of the virus shock and that changed everything. The days’ following announcements (particularly from the US Fed) saw highly respected financial analysts saying things along the lines of ‘what they are doing is off the chart big’. Markets took notice and started to recover.

The unprecedented economic changes triggered by Covid 19 may in some ways be more long lasting in significance than the pandemic itself.

a) The willingness of central banks to pump unlimited liquidity into economies post Covid stems from the actions taken by the Fed post the Financial Crisis of 08/09.

The policy decisions taken in 08/09 reversed 30 years of Western economic orthodoxy. Monetary theory created by Milton Friedman in the 1970s and first used in the US and U.K. in the early 80’s by Volker and Howe, mandates that previously high levels of inflation must be reduced then controlled by limiting the levels of money supply. This was achieved by Central Banks setting targets for inflation and employment, using interest rates proactively to either stimulate or decelerate economies as necessary.

Example : Raising rates will drain money from the system causing economies to slow. This reduces demand, lessening pricing power thus lowering inflation……Bada Bing-Bada Boom

b) So when Fed chair Ben Bernanke pumped trillions of dollars into the US economy in 08/09, most of the wise and the good predicted raging inflation as a consequence.

But… it just never happened.

Lots of theories as to why not and it’s interesting stuff, but suffice to say the fear of excess liquidity causing inflation has currently all but disappeared.

c) A constraint to pumping in mega amounts of new money to economies is it must come from somewhere.

The QE programme effectively creates it out of thin air with the FED or Bank of England expanding their balance sheets by borrowing from themselves.

Governments borrow money by issuing Sovereign debt and can do this today at lower interest costs than inflation. Germany has actual negative rates so get paid for borrowing; they actually make a profit.

This means the net cost of new debt servicing plus repayment is currently all but zero for Western Governments, so stimulative fiscal policy such as large infrastructure spending is highly likely.

d) All investment classes must be re-examined through the prism of this new extreme interest rate environment. Interest rates have been reduced to pretty much zero everywhere.

This simply has to change the valuations for assets which offer a positive (above inflation) return, sovereign debt and most bonds now don’t. The relative attraction of Equities, Property and Alternatives such as ESG or Infrastructure will be major beneficiaries of strong inflows of new capital.

e) There is an estimated $7-8 Trillion in cash or equivalents across investor classes which currently suffer a negative real return. Money won’t stay in these assets, at these levels. It will be forced to find better returns.

f) The levels of redeployment will depend in large part on how long rates remain super low. Some money will move quickly to find positive returns, some won’t.

g) The Fed recently stated that even if inflation does pick up beyond target, they will ‘let it run hot’ for a time. This makes sense if inflation rates are to average 2.5% over time as they will be sub that level this year and probably next. This means we can be confident negative real rates are pretty much locked in for the next 3-4 years.

This is a long enough period to push massive new flows of capital into risk assets. Likely commencing in earnest after a successful vaccine is available.

Part 2 – the COVID 19 realities

1) Much of the media has portrayed Covid 19 as a rerun of the Spanish Flu epidemic of 1918-19 which killed an estimated 50 million people globally. Is this accurate?

The answer is simply No, absolutely not.

The Spanish flu was most dangerous to the young and relatively not to the older population. Covid is the complete opposite.

Covid is predominantly dangerous to those over 70 and/or with compromised immune systems.

2) What is Herd Immunity?

The current data indicates that between 50%-60% of the population has natural immunity to Covid 19. This is the amalgam of those that won’t ever catch it or if they do, will remain asymptomatic. Meaning around 45% of a population are at risk of developing symptoms.

Again current data puts the total infection rates of the US population as an example at around 12%.

So around 12% of the US have already been infected. This is 12% of total population which equates to around 40%-50% of the people that are at risk of developing symptoms.

So to recap, of the total population, 55% won’t get it. Of those that will, around half already have, which leaves around 20-25% who could develop symptoms but haven’t yet.

Put round the other way, means 75-80% of the population is not now at risk.

3) Putting Covid figures into perspective. Globally, Covid is the identified cause of around 1 million extra deaths in 2020. The annual deaths attributed to Flu globally is 450,000 on average each and every year, but in a bad flu season can be as high as 650,000.

Using the US again as a proxy.

Currents Covid deaths 210,000

In 2019, the figures for causes of death in the US:

Heart Disease 650,000

Car Accident 170,000

Opioid Overdose 70,000

4) Sweden

The Swedish Government were the high profile hold out when it came to locking down.

They initiated a model from the start similar to the U.K. instituted from July onwards so social distance, avoiding crowds in enclosed spaces etc.

Their mortalities totalled 6000 to the end of June and have declined to only a very few since.

It is firstly instructive to note that the Imperial model predicted Sweden would suffer 96,000 deaths by the end of June. Also their mortality percentage is similar to the U.K. which did lock down.

It is secondly horrific to understand that around 75% of their mortalities were as a result of moving recovering patients out of hospitals and into care homes.

This was a mistake made across Europe in the early days of the pandemic and caused by the overriding imperative to free up hospital beds. Still-symptomatic people were put directly into the most high risk environment possible which is just heart breaking, but nobody knew.

5) A Vaccine

The obvious answer to all the ills of Covid is a vaccine, and it looks highly likely that one or more will be available by the spring of 2021 if not earlier.

From a global psychological perspective, it’s a total game changer. The world’s population is absolutely traumatised by the threat of Covid and knowing there’s a treatment will allow things to start to return to more normal levels fairly quickly.

The reality of the actual necessity or veracity of a vaccine is questionable though on two fronts:

a) Herd immunity is happening pretty quickly.

b) The ‘at risk’ group are the elderly (and already immune-compromised people of any age) and vaccines for this cohort are generally far less effective than with younger fitter age groups

But from an investment perspective a vaccine will unquestionably unleash a far greater appetite for risk and asset values will therefore be strong.

Note: This is written in a personal capacity and reflects the view of the author. We have not checked whether the information and data is correct, and the sources of information. It is important to note that the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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